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I would to apologies in advance if I have misplaced this thread or if I have stated anything that is incorrect, please bare in mind I am new to this forum and the world of accountancy.

What I am having a great deal of trouble getting my head around is Income Tax on VAT.

So, if I was a business with an income of £8500/week that was VAT bound totalling at £1415 (rounded), paying wages at £1700, with expenditure of £2700 (including VAT £180) and hiring professionals for £2100 (including VAT £350).

Using these figures does this mean I would get taxed on profits with the figure £585/week (Income Tax: 115) or £1115/week which includes Input VAT (Income Tax: £305) second figure includes the Input Tax??? So this means in my case that my Input VAT has now basically dropped to £340 from £530 is this how it works out???

Why I had trouble understanding this part of the equation is because surely you can't get taxed on tax, I didn't use the Input VAT to gain profit and I'm only claiming back what was mine as a business in the first place.

Thanks to whoever takes the time to explain this to me and how it actually all comes together. Hope it made sense.

First point is don't try to merge IT and VAT. Keep them separate in your mind.

If you make a profit by being VAT registered, i.e. able to add vat to your customers but able to reclaim on your purchases, then of course there'll be more IT as you've made more profit due to being VAT registered.

But it's not IT on VAT. Look at it the other way, because you can reclaim the VAT on your expenses, your costs are now lower. Because your costs are lower, your profits are higher.

Basically if you are VAT registered in your income & expenditure VAT cancels itself out. The money you receive from the VAT on sales equals the VAT you pay on goods you have purchased plus the VAT payment to HMRC. If you are filing self assessment then VAT does not appear in the filing.

In a way, yes it is charged twice. VAT - Value added tax, is a tax on the added value. If one generates profits by adding value, one is also liable for the income tax. E.g.

Bought something for 5 quid, and sold it for 10.
Added value is 5 quid, and thus HMRC will want to see 1 quid from you.
And if there are no other expenses/income, there is 5 quid of profit and 20% corporation tax is due as well, another quid. Thus net return is only 3 quid.

However, in most countries one does not pay VAT out of their pocket, but pass it along because both purchase and sale charge VAT. Meaning, one buys something for 5 quid + VAT (total invoice 6 quid) and sell for 10 quid + VAT (total invoice/receipt 12 quid). Such that 5 quid of profit is generated, and 2 quid generated to pay VAT to HMRC. This is how vat works, and in the UK VAT-registered entities must charge VAT and may reclaim VAT they paid on business-related goods or services. So above there is still 5 quid of profit, which is taxed. And thus net return now is 4 quid.

Unfortunately if one generates a lot of sales with VAT, and has little expenses with VAT, one does end up paying a large VAT bill. And if one did not set aside money to pay for vat, a cashflow crisis can arise. (e.g. if total proceeds from sales including vat were used up to buy more stock)

Sad reality is that yes one can generate tax liability larger than profits, resulting in net loss. This is why cashflow management is important. Tracking tax liability on ongoing basis is important. And one must project when and how much one will have to all taxes.

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